17 December 2001
Who says that law-yers are too old to get presents from Father Christmas? This year, Santa's brought a sackful of work to Enron. With thousands of Enron employees now facing redundancy, lawyers will not publicly celebrate the work, but it will certainly be welcome. Litigation and insolvency departments can expect to gain the most, but those corporate departments that have been feeling the economic downturn will get a seasonal bonus.
Just last year, Enron was number seven in the Fortune top 10. Nobody could have predicted such a dramatic downfall for a company that defined the role of energy market maker. By October, though, Enron's accountancy firm Arthur Andersen was under fire from the Securities and Exchange Commission, its credit ratings were about to collapse and shareholders and employees were plotting class action lawsuits. A market maker cannot buy and sell without market confidence, so as soon as the press got wind of Enron's vulnerability, the bad news snowballed.
When the directors called in Weil Gotshal & Manges in October, they must have suspected that the Dynegy merger was the last chance saloon for Enron. The company's heart is in Texas and, ordinarily, it might have instructed its Houston-based longstanding adviser Vinson & Elkins. Weil Gotshal, though, has a reputation for crisis management and has the capacity to do either a major M&A transaction or a complex bankruptcy. The same is true of Linklaters, which was called in as the UK adviser.
When the deal was agreed, it had only a small UK component. Linklaters was on the Enron side, while Allen & Overy would have given M&A advice to Dynegy alongside US firm Baker Botts. It was a nice job for the two UK firms involved, but hardly a major revenue generator. But in the last week of November, Dynegy pulled out and Enron's credit ratings were immediately slashed. Nervous creditors and trading partners turned to their lawyers and some of Enron's UK-based customers immediately terminated energy contracts. When the UK administration was announced, telephone lines were jammed as companies called legal advisers for advice and reassurance. By last week, medium-sized firm Lawrence Graham had set up an Enron telephone helpline, and everyone was on the bandwagon.
In the UK, Linklaters has secured the most lucrative position as legal adviser to administrator Pricewaterhouse-Coopers (PwC). There are also plenty of creditors to Enron Europe that will require advice. Worldwide there is a tangled web of exposure to the parent company that will need to be addressed now that Enron has filed for Chapter 11 bankruptcy. Abbey National, ABN Amro, AEGON, ANZ Banking, Axa and American Electric Power Company are all believed to be creditors, and they are just the ones beginning with 'a'. US lawyers, who have the advantage of class action suits, will be also be kept busy for decades with litigation over creative accounting and financial mismanagement.
In the UK, PwC has just sold off the first Enron Europe subsidiary. Enron Direct was sold for £94.6m to Centrica, which was advised by Ashurst Morris Crisp. There was a number of other bidders, racking up considerable M&A work for other corporate departments.
Outside the magic circle, corporate departments have been particularly hard hit by this year's M&A downturn. With some of the top five already tied up with Enron or its major creditors, firms outside the magic circle can now expect to pick up lucrative advisory work. Ashursts, for instance, had worked for Centrica previously, but Linklaters is the company's main corporate adviser .
In the longer term, the picture is not so bright. Enron's collapse will hit the already troubled US economy. Corporate departments are perhaps the most globalised parts of many law firms and are particularly dependent on US-based companies doing M&A in Europe. For this Christmas, though, lawyers will be grateful for a temporary corporate upturn.